96-061
A THEORY OF BANKING STRUCTURE
Sanjiv R. Das and Ashish Nanda
This paper proposes that the services performed by banks can be distinguished
along two functional dimensions: (1) the degree of information asymmetry resolved in
providing the service, and (2) the degree of verifiability of the value of the service
rendered. This translates into four categories of banking activities with attendant
implications for the length of banking relationships and the degree of skill specialization
and resource intensity that banks develop in order to perform these activities. We
develop a framework - in which the equilibrium outcome is long-term contracting when
information is specific, and short-term when it is non-specific, to the service - that
demonstrates that costly overspecialization occurs in certain deal-type transactions and
underspecialization occurs in lending-type transactions. We propose an explanation for
phenomena such as bank syndication, and show that first-mover advantages and
monopoly skills are natural outcomes of the model. Our analysis has implications for
banking regulation such as the Glass-Steagall Act.
FIN, GM
43 pages
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